Myungsoo Son

A Comparison of Reporting Lags of Multinational and Domestic Firms

This study examines whether multinational firms report earnings sooner than domestic firms. When compared with domestic firms, the reporting environment and business operations of multinational firms are significantly more complex. There is a greater amount of information asymmetry between managers and shareholders of multinational firms. Therefore, multinational firms potentially face higher monitoring and external financing costs. To reduce these costs, we conjecture that managers of multinational firms take steps to reduce the information asymmetry between shareholders and management by increasing the timeliness (a proxy for relevance) of their earnings reports. Specifically, we expect multinational firms to announce earnings earlier than domestic firms. We separate earnings reporting delay into auditor-related delay and managements discretionary delay. While test results weakly support the hypothesis that auditors take longer to audit multinational firms, there is strong evidence that managers of multinational firms release their earnings reports sooner than domestic firms.

Do audit delays affect client retention

Purpose - The purpose of this study is to examine whether lengthy audit delays lead to auditor changes in the subsequent year. The paper hypothesizes that a lengthy interaction between clients and their auditors reflects high audit risk factors relating to management integrity, internal controls, and the financial reporting process. It argues that auditors are more likely to drop clients with long audit delays because they would like to avoid these types of audit risks. Design/methodology/approach - Using logistic regressions, the paper first tests whether a lengthy audit delay leads to an auditor change. It then examines whether as audit delays increase, auditor changes are more likely to be downward than lateral. Findings - The results support the hypothesis that Big N auditor-client realignments occur following long audit delays. Further, as the length of the delay increases, the paper finds that there are more downward changes. Research limitations/implications - An implication of our study is that a long audit delay represents a publicly observed proxy for the presence of audit risk factors that lead to an auditor change. Practical implications - This study suggests that all else constant, investors should consider a lengthy audit delay as indicating that there has been deterioration in the quality of the client-auditor interaction. An audit delay also presents an observable proxy for successor auditors to consider while evaluating risks associated with a new client. Originality/value - The results of our study increase our understanding of how Big N auditors manage their client portfolios to mitigate their exposure to risk factors.

Do Audit Fees Reflect Risk Premiums for Control Risk

This study examines whether audit fees reflect risk premiums in the presence of control risk after controlling for audit effort through audit delay. Our results indicate that auditors adjust risk premiums as well as audit efforts in response to altered control risk. Further analysis shows that the extent of risk premium adjustment varies depending on the severity of the underlying internal control problems. Overall, these findings provide insights into the distinct role of audit effort and risk premium in audit pricing decisions.

Earnings Announcement Timing and Analyst Following

Using a large sample of firms in the post–Regulation Fair Disclosure (Reg FD) era, we examine the cross-sectional association between earnings announcement timing and analyst following that precedes it—that is, potential competing information. We fail to find a positive association between earnings announcement delay and preceding analyst following, as would be expected if the two were substitutes. Our findings of a negative association suggest that firms with large analyst following tend to announce annual earnings earlier than others. Furthermore, when we investigate the tendency of analysts to follow firms, a negative association exists in the regression of analyst following on prior earnings announcement delay, suggesting that analysts are more likely to follow firms that report earnings early. Collectively, managers’ earnings announcement timing and analyst following are not a substitutive relation, but rather a complementary one.

Earnings announcement timing and earnings management

This study examines whether earnings announcement timing is associated with earnings management. Unlike prior studies, we partition earnings reporting delay into two separate components: audit report lag and management discretionary lag. Using recent data, we find that less earnings management by late earnings reporters are attributable to auditors rather than management. After controlling for other factors, we show that auditors who lengthen their audit work are likely to permit less earnings management, possibly to minimize their litigation risk. This drives a negative association between total report lag and earnings management. However, no statistically significant association is found between management discretionary lag and earnings management. We find a positive association between management discretionary lag and earnings management only in the sub-sample where earnings were disclosed after the audit report date. 1 Data is publicly available from sources identified in the article.

The association between human resource investment by audit firms and their audit quality

Abstract Utilizing unique data available only in Korea, we examine the association between investment in human resources and audit quality provided by audit firms. While human resources investment is important in improving audit quality, few studies have examined this association mainly because public data about human resources investment and financial statements of audit firms are unavailable. Using two proxies for audit quality (i.e. discretionary accruals and accounting conservatism), we provide evidence that higher compensation in audit firms improves audit quality. In addition, we find higher audit quality in audit firms with higher education expenses, when audit quality is measured by the level of conservatism of clients’ financial statements. These results support regulators’ stance that quality control through human resources investment in audit firms can effectively improve audit quality and therefore the quality of clients’ financial reporting. However, we find no association between education expenses and the average absolute value of discretionary accruals of audit clients. These results generally suggest that direct investment in human capital (i.e. compensation) is more effective in improving audit quality than indirect investment in human capital (i.e. education expenses).

How does human resource investment in internal control affect audit reporting lag

Abstract The Korean government requires listed firms to disclose the total number of employees engaged in the implementation of internal controls (hereafter, IC personnel) and the number of IC personnel in accounting, finance, information technology and systems departments, and other related functional areas. Using data unique to Korea, this study examines the effect of human resource investment in internal control on audit reporting lag (ARL). We employ quantitative and qualitative measures for the IC personnel, and the ARL is measured by the time between the fiscal year-end and the audit report date. We find an insignificant association between the quantitative measure (the number of IC personnel) and ARL. On the other hand, we find that the qualitative measure (the average experience of the IC personnel) reduces the audit time, thereby decreasing the ARL. This result highlights the importance of qualitative aspect in investments in IC personnel, which could be useful for firms that desire to reap the best result from the investment. Further analysis shows that investments in IC personnel at other departments as well as accounting and finance department increase audit efficiency. We confirm the robustness of our results through a series of additional analyses.

The impact of labour unions on external auditor selection and audit scope: evidence from the Korean market

ABSTRACT We examine whether labour unions influence external auditor selection and audit scope. As a major user group of financial information, labour unions likely demand financial information of high quality and thus high-quality audits. As a union’s request for wage increases is likely strong when a firm is performing well, management facing wage negotiations with the labour union has incentives to manipulate earnings downward and may therefore prefer auditors who allow more discretion. Using union data unique to Korea during 2005–2008, we find that firms with a stronger labour union tend to choose higher-quality auditors (i.e. Big N or industry specialist auditors). We also find that unionization is negatively (positively) associated with positive (negative) abnormal audit fees and audit hours, and the effects are more pronounced when the union is stronger and more active. Given that departures from normal audit fees and audit hours in either direction arguably impair audit quality, this finding is consistent with our prediction of unions’ demand for high-quality audits. Overall, our findings suggest that labour unions play an important role in determining audit quality.